Archive for June, 2012
Looking over the precipice of
national default and an untimely exit from the international
monetary system, the Greek leader issued a somber warning to
Europe’s economic leaders: “Bear in mind that if you leave the
small states without assistance, a black future awaits Europe.”
Delivered by Prime Minister Eleftherios Venizelos on April
15, 1932, less than two weeks before his nation would suspend
loan repayments and exit the gold standard, the prescient remark
and the trials that followed offer urgent lessons for the
current Greek crisis.
Before the euro bound the continent’s disparate economies
into one monetary system, European governments relied on the
gold standard to direct international monetary flows. This
promised stability, but also required the vigorous coordination
of each country’s central-bank policy. The turmoil of World War
I disrupted the international order, pushing Greece and the rest
of Europe off the standard, a blow from which the monetary
system would never fully recover.
Nevertheless, in the absence of alternatives, gold remained
the standard for much of the rest of the developed world, and
Greece made the drachma convertible to gold in 1928 under the
leadership of Venizelos’s Liberal Party. A centerpiece of the
government’s reform agenda, the return to gold, combined with
vigorous economic development and large-scale public works,
promised to turn Greece into a “synchronon kratos,” or modern
state. Further, re-gilding the drachma offered pride to a Greek
nation that had recently suffered prolonged inflation and
This triumphant return was not only desired from within
Greece, but imposed from without. Venizelos’s project was
largely dependent on foreign financing, both in the form of
government loans and direct foreign investment. The drachma’s
convertibility was thus also meant to appease investors. So too
was the regime’s simultaneous creation of the Bank of Greece,
the country’s first true central bank, which replaced the
privately owned National Bank of Greece as the issuer of the
The Great Depression, though, came at an inopportune time
for the fledgling Greek financial system. When the world economy
began to decline in 1929, Greek exports dwindled, creating an
acute imbalance — more foreign currency left Greece through the
purchase of imports than came in through the sale of exports,
draining the currency reserves of the Bank of Greece. This
situation was exacerbated by the country’s foreign debts, which
also had to be repaid in foreign currencies, such as the UK
pound and the French franc. As effectively gold equivalents,
these monies undergirded the drachma; as they left Greece, each
successive loan payment made defending the currency more
To make matters worse, the country’s commercial banks began
speculating against the drachma. Led by the recently displaced
National Bank of Greece, these institutions purchased Greek
national bonds, securities denominated in pounds and francs, on
foreign exchanges — securities that would be worth more if the
drachma was devalued.
Yet while Greece’s development had been financed by foreign
borrowing, the government could hardly be accused of profligacy.
As Greece’s exchange crisis increased during the late 1920s and
into 1931, Venizelos’s government still managed a budget
surplus, and relative to other nations the Greek economy
suffered less from the global depression. Nevertheless, as
economists such as Barry Eichengreen have conclusively shown,
the gold standard, like the euro in recent years, spread
The Venizelos government searched for a solution. In the
first salvo of the “battle for the drachma,” the Greek
parliament considered a regulatory package aimed at
strengthening the Bank of Greece’s control over the country’s
commercial-banking sector. But the National Bank of Greece and
its allies intervened, so weakening the bill as to make it
As the crisis deepened, the government sought international
assistance, turning next to the Europe-dominated League of
Nations Finance Committee. The fight for the drachma was quickly
draining Greece’s financial resources, and the government’s 1931
surplus flipped to a sharp deficit in 1932. To meet this
shortfall, to keep up its bond payments and to retain the gold
standard, Greece needed an injection of foreign capital. In a
familiar tune, most recently sung in a German accent, Europe’s
financial leaders demanded austerity as the price for
assistance. The French delegate advocated closing schools and
cutting the salaries of public employees by 20 percent.
These were harsh terms, and Venizelos feared that the
sacrifices demanded by the guardians of the international
monetary system would doom his liberal regime and perhaps
democracy in Greece. To build national unity, he reached out to
the opposition Populist Party, hoping to form a coalition and
share the burden of leadership. The party’s leader, Panayis
Tsaldaris, curtly refused.
By April 1932, Greece was out of options. Without
substantive foreign intervention, the combined pressures of
foreign debt service and hemorrhaging currency reserves finally
forced Greece off the gold standard and into default. By tying
his regime to the integrity of the drachma, Venizelos also
ensured his fall from power, while the subsequent decline of his
centrist Liberal Party shattered the Greek political system.
After default the Greek economy actually began a steady
recovery as the nation turned its efforts toward self-
sufficiency outside the global market. But in this case, the
inward-looking recovery was a false friend, and the political
instability that followed the drachma’s devaluation paved the
way for a successful coup by General Ioannis Metaxas. Whether
his regime was a fascist one or merely conservative-
authoritarian is an academic debate that accepts a simple fact:
It wasn’t democratic.
It is unlikely, whatever the outcome of Greece’s present
currency crisis, that fascism lies in the nation’s future.
Venizelos believed that liberal democracy couldn’t withstand the
burdens imposed by the international monetary system, and his
solution was to exit that system, with unfortunate results.
Although to date Greek leaders have made different choices, a
black future may still await Venizelos’s country — and Europe -
- if Greece and similar small states are left without
(Sean Vanatta is a graduate student in history at Princeton
University. The opinions expressed are his own.)
Read more Echoes columns online.
To contact the writer of this post: Sean Vanatta at
To contact the editor responsible for this post: Timothy Lavin
CLEVELAND A Federal Reserve Bank president said Thursday adequate procedures are in place to keep bankers serving as directors of regional Fed banks from influencing Fed supervision of their banks.
Sandra Pianalto, president of the Cleveland Federal Reserve Bank, said she depends on bank executives who serve as directors of her bank to provide frequent and timely information about economic conditions.
Its important information that I get, she said during a remarks to reporters following a speech at a Cleveland conference for the National Association for Business Economics.
Regional Fed bank boards have been in the spotlight since Sen. Bernie Sanders (I., Vt.) introduced legislation last week that would prohibit bankers from serving as directors for regional Federal Reserve banks. Sanders described the current arrangement as a blatant conflict of interest because the Fed is responsible for regulating banks whose executives serve as directors of Fed banks.
The Federal Reserve system has 12 regional banks. Each one has its own board with nine directors who come from outside the central bank system. Commercial banks that belong to each regional bank district elect six of the nine board members and the Feds Washington-based Board of Governors appoints the remaining three.
Pianalto declined to comment directly on Sanderss bill, but said shes confident that no conflict exists between the Feds supervisory activities and the bankers serving as Fed bank directors.
Policies are in place that protect supervisory information from bank directors, she said. Pianalto said she supports recent procedural reforms that barred bankers from selecting their regional Fed bank presidents.
We have appropriate policies in place that bank directors are not involved in the selection of Fed bank presidents, she said.
Pianaltos sentiments appeared to be in line with those of Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, who last week said it would be a mistake to banish banking executives from the boards of regional Fed banks.
Sanderss push to change the board structure of the regional banks came in the aftermath of JP Morgan Chase amp; Co.s (JPM) disclosure of more than $2 billion in trading losses from bad investments at a time when Chief Executive James Dimon is serving on the New York Feds board. Sanders has said Dimons presence on the New York Fed board exposes the bank to speculation that Dimon could influence the banks regulatory actions toward JP Morgan.
Pianalto, a voting member of the monetary policy setting Federal Open Market Committee, said the Feds current monetary policy remains appropriate for the performance of the US economy. She expects the US economy to grow by 2.5% this year and by 3% in 2013 and 2014. She said the sluggishness in US employment is not an indicator that the US GDP expansion is stalling.
One month, or even a couple of months, of [weak] job data isnt changing my outlook that the economy will continue to expand, she said.
She added that it may take as long as five years for the US unemployment rate to drop to the 6% level widely considered as a full-employment level.
Nevertheless, Pianalto said shes convinced that persistently high unemployment, especially in the manufacturing sector, is a lingering side effect of the severe economic recession in 2008, rather than a structural change in the US economy that will result in fewer available jobs going forward. She said low natural gas costs and a US work force with improved skills have made the US more competitive as a location of job creation and investment in capital equipment.
She added that overall US production capacity remains 6% lower than in 2007, suggesting that companies have lots of catching up to do after closing plants and scaling back production during the recession.
Copyright copy; 2012 Dow Jones Newswires
On most public policy controversies, there are two fairly well-defined sides, often aligned with the two major political parties, and the challenge is to win elections so that “your” party’s policies will get enacted. In contrast, monetary policy has traditionally been characterized by pervasive voter ignorance. Most voters have no opinion about the subject at all, and many of the voters who do have an opinion are deeply misinformed.
And unfortunately, a vocal minority of the political right has gotten the mistaken impression that we’re currently suffering from too-loose monetary policy. So I was delighted to see this new piece from economist David Beckworth and conservative commentator Ramesh Ponuru. They explain that monetary policy has actually been far too tight in the last four years, and they make the case for shifting monetary policy to focus on achieving a steady growth in nominal (that is, non-inflation-adjusted) incomes. Beckworth and Ponuru’s article is consistent with the views of the late Bill Niskanen, who penned the monetary policy chapter of the Cato Handbook for Policymakers back in 2008.
It’s hard to overstate how important this issue is. If Beckworth and Ponuru are right, and I think they are, Ben Bernanke could (with the support of the Fed’s board of governors) end the recession in a matter of weeks if he wanted to. That wouldn’t solve all the world’s problems, but many of the world’s problems are exacerbated by our anemic growth rates and persistently high unemployment. Better monetary policy is not, and should not be, a partisan issue.
Update: A previous version of this post described Bill Niskanen’s chapter in the Cato Handbook for Policymakers as Cato’s official position. I’m told that this is incorrect so I have updated the post accordingly.
NEW YORK (Reuters) – Things are shaping up for another hot summer on Wall Street, and there is a long, long way to go yet.
Federal Reserve Chairman Ben Bernanke will be back on Capitol Hill on Thursday to testify before a congressional committee about the state of the US economy. Hes not going to get an easy ride.
The blue-chip Dow average .DJI of stocks is now negative for the year. Employment appears to be slowing to a snails pace and Europe remains mired in crisis.
This puts the Fed firmly in play and they will likely feel compelled to respond, said Tom Porcelli, chief US economist at RBC Capital Markets in New York, after data on Friday showed US job growth in May was the weakest in a year.
The missing ingredient preventing the Fed from action had been the equity market, but now we are seeing it softening, he said. Equities are falling and that was the last hurdle for Fed policy action because all the other criteria have been met.
For the week, the Dow Jones industrial average fell 2.7 percent, the Standard Poors 500 index .SPX was down 3 percent and the Nasdaq composite index .IXIC fell 3.2 percent.
The Feds next policy meeting occurs on June 19-20. A Reuters poll of 15 dealers gives a 35 percent chance of the Fed extending its stimulative operating twist at that meeting. The poll showed that dealers expecting further quantitative easing, or QE3, rose to 50 percent from 33 percent in May.
Stock market rallies in each of the past three years were fueled by combinations of massive central bank and government stimulus spending. That maybe the only hope for equities this year, too.
The worlds economic outlook darkened on Friday as reports showed as well as slowing US employment growth, Chinese factory output barely grew and European manufacturing fell deeper into malaise.
It certainly suggests that perhaps the softness in Europe is either influencing the US or that the US recovery may not be strong enough to overcome the softness in Europe, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
I underestimated the relationship or the alignment of the world markets to the European markets, he said. I felt that Europe could potentially proceed in their own little corner of the world. For right now anyway it just doesnt seem that way.
Nothing tells the story of the global economy at the moment better than the worlds equity markets.
Bear markets are raging in Spain, Italy, Brazil and Russia. Asian stocks have been weak. Most of Europes other markets are negative for the year, and that is where US stocks are going – and fast.
I dont see any compelling reason to think that we are going to have any sustained recovery absent new fiscal, monetary stimulus, not only here in the United States but perhaps even more importantly elsewhere around the world, said Clark Yingst, chief market analyst at Joseph Gunnar.
Yingst said that signs of more stimulus may be a compelling reason to get bullish.
We will be watching very closely for new fiscal and monetary stimulus from a variety of countries. I think the source will be important, I think the magnitude, the scope will be important, he said.
On Friday the SP 500 fell 2.5 percent, edging below its 200-day moving average for the first time since December. The level is closely watched by investors, and a significant breach there could open the way for steeper losses.
That looks like a distinct possibility at the moment. Greece will face new elections in two weeks. A victory for parties that oppose the bailout led by the European Union and International Monetary Fund could start the ball rolling on the countrys withdrawal from the euro zone.
Such an event would have unforeseen consequences for the global economy and financial markets. Part of the 6.3 percent drop in the SP 500 in May – its worst month since September – was about pricing that in.
But it is anyones guess how far stocks will fall if a Greek exit sparks the Lehman-type event that some investors fear.
Fears the euro-zone debt crisis is spilling over to the United States sparked fresh buying of US, German, Japanese, Swiss and Nordic government debt, which are perceived as safe havens in times of market turbulence.
Yields on the benchmark 10-year Treasury note hit 1.442 percent, the lowest level in records going back to the early 1800s.
At the same time, funding options are narrowing for companies across the globe as issuers are shut out of markets due to risk aversion for weaker credits and demand for spread that is sending costs soaring.
Volume in the robust US investment-grade market has dwindled from $284.8 billion in the first quarter to just $118.7 billion in the first two months of the second quarter, according to data from IFR, a unit of Thomson Reuters. That number is expected to fall even more in the summer.
But not everyone is hitting the sell button. Zahid Siddique, associate portfolio manager of the Gabelli Equity Trust, says his two to four year time horizon and focus on value is allowing him to add to positions in sectors that are getting hit the hardest.
Companies that we liked before are becoming more attractive from a valuation perspective and we have been buying more of those, he said. We just buy on any dips and exit when valuations reach our assessment of value.
Siddique said hed been adding to holdings in auto suppliers, aerospace and consumer sectors.
(Reporting By Edward Krudy; Editing by Kenneth Barry)
Federal Reserve Bank of Philadelphia
President Charles Plosser said the central bank should be more
open about how it sets monetary policy.
“We can and should improve our discussion of the economy
and our approach to policy through the publication of a more
comprehensive monetary policy report to the public,” Plosser
said in an essay posted to the Philadelphia Fed’s website. “We
can also better define our reaction function, to enable the
public to better understand and anticipate future policy
Plosser endorsed the steps the Fed took this year to boost
communications, including revealing policy makers’ forecasts for
interest rates and adopting an inflation target of 2 percent.
Since becoming chairman in 2006, Ben S. Bernanke has pushed the
central bank to increase its openness and public understanding
of the Fed, including by holding regular press conferences.
“Economic research has shown that increased transparency
can improve the effectiveness of monetary policy, as well as the
Fed’s accountability with the public,” Plosser said.
The Philadelphia Fed chief said the policy-setting Federal
Open Market Committee is “still some way from agreeing on one
systematic policy rule or reaction function,” and that one way
to try to achieve such a goal “would be to describe the
variables that are important for our reaction function.”
Plosser also reiterated his concern the Fed has
“contributed to the breakdown of the boundaries” between
monetary and fiscal policy by allocating credit to specific
asset classes and through the bailouts of firms including Bear
“We must seek ways to ensure that our central bank
preserves its independence and that the boundaries between
monetary and fiscal policy are restored,” Plosser said.
To contact the reporter on this story:
Caroline Salas Gage in New York at
To contact the editor responsible for this story:
Chris Wellisz at
With Floyd Mayweather winning on Saturday, the focus now turns to Manny Pacquiao and his June 9 meeting with Timothy Bradley. If Pacman wins as he should, the talk will start up once again about a potential super fight between the two welterweight legends.